Do Senior Citizens Need to File Bankruptcy?

Posted in Personal Bankruptcy
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

senior-citizens-bankruptcyDoes it ever make sense for retirees to go bankrupt? For many seniors, yes. From our most recent Joe Debtor study just over 7% of insolvent debtors were retired. The amount of seniors (60+) that file a bankruptcy or consumer proposal with our firm has increased from 10% to 12% over the past two studies. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to formally deal with their debt.

But is seniors’ debt the problem, or the symptom?

The problem with carrying debt into retirement is that it must be serviced with less income than when seniors were working full-time. Some adapt by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with seeking assistance from a Licensed Insolvency Trustee.

That’s exactly correct. If you already have debt when you retire, and your income drops when you retire, it may become impossible to service your debt and pay your living expenses. It may not even be your fault. Many seniors financially help their adult children who are struggling to get on their own two feet. That can often deplete their retirement nest egg, and even lead to new debt.

What can seniors do if they have debt problems?

I’ve covered some of these issues in our article on What are My Options if My Income is from Social Assistance, Pensions, or Support Payments?, but here’s a summary of your debt management options if you have debts, and all of your income is from pensions:

First, you can do nothing, and stop paying your debts.

If you have no assets, and if all of your income is from pensions, in most cases your creditors will be unable to garnishee your pensions. More specifically, a creditor cannot garnishee your wages if you don’t have any, so you could do nothing and the creditors would have no way to enforce any legal actions against you.

Of course doing nothing doesn’t eliminate your debt. The creditors may still phone you and send you letters, and they may take you to court, so you haven’t solved the problem; you have simply ignored them. If you open a new bank account at a bank where you have no debts, and if you are not stressed out by the phone calls, and if you have no other assets, doing nothing may be the correct option for you.

However, if doing nothing would be too stressful for you:

Your next option is to deal with the debts on your own. You could sell your house, or liquidate investments like RRSPs, and use the proceeds to pay off your debt. You probably don’t want to sell your house, but selling may be a wise financial move if you can eliminate your debts, and reduce your monthly living costs by moving to a smaller house or apartment.

Second, if you have no assets to sell, the next option would be to consider a debt consolidation loan. With a debt consolidation loan you borrow at a bank at reasonable rates to pay off your high interest debts, like credit cards. The lower interest rate may allow you to devote more of your monthly payments to principal instead of interest, so you can repay your debts on your own. However, to qualify for a debt consolidation loan you may need assets (like a house) to pledge as security, or you may need a co-signer (since your pension income may not be sufficient to allow you to qualify on your own).

Your third option is to pay off your debts (in part, or in full)

Full repayments of your debts can be done through a debt management plan performed through a not-for-profit service like credit counsellors. In a debt management plan you repay all of your debts in full, but generally at a reduced or zero interest rate. For example, if you have $50,000 in debts, you could pay $1,000 per month for 50 months through a debt management plan.

If you can’t afford to repay your debts in full, the fourth option is a consumer proposal. In a consumer proposal you repay a portion of your debts. The amount you repay is negotiated by your Hoyes Michalos consumer proposal administrator with your creditors, and depends on your income, your family size, and your assets. For example, if you have $50,000 in unsecured debts, it may be possible to negotiate a settlement where you pay $500 per month for 50 months, or roughly half of the amount owing, or perhaps even less.

If even a consumer proposal is more than you can afford, the final option is personal bankruptcy. Bankruptcy discharges your unsecured debts, but there is a  cost of bankruptcy, and it will negatively impact your ability to borrow in the future.

As you can see, there are many factors to consider when deciding how to deal with your debts. The answer to the question: “Does it ever make sense for retirees to go bankrupt?” depends on your situation.

For a retiree, the cost of bankruptcy may simply be too high, and the “do nothing” approach may be the best option. However, the stress of the situation may lead you to decide that a consumer proposal or bankruptcy is the correct option.

The options can be confusing, so here’s my advice: give our office a call, or email us and we can discuss your options. Our consultations are free, and there is no obligation, so deal with the stress and contact us today, and then you too can have a fresh start. Let’s get started.

debt help seniors